How Do Companies Boost 401(k) Enrollment? Make It Automatic

April 21, 2014

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More Americans are saving for retirement through their
employers' 401(k) programs. That's because in recent years they've been given a
strong nudge — more companies are automatically enrolling workers in retirement
savings programs.

Some firms are also
automatically increasing the amount employees contribute. That's just as
important, experts say.

And all this makes a
big difference: Without it, millions of Americans don't save at all.

Making
Time For Retirement Planning

A
recent survey by TIAA-CREF found
that, compared to setting up a retirement account, Americans spend more time
choosing a flat-panel TV, or what restaurant to have a birthday party at.

"Yeah, it's
kind of embarrassing to admit that I spend a lot more time doing other
things," says Mary Hakken-Phillips, a 33-year-old executive assistant in
Chicago.

She says says she
spends countless hours planning vacations, for example. But retirement planning
— not so much.

Like many Americans, Hakken-Phillips knows she should be saving
for retirement. She even works at a financial services company. "I was
hired in June of 2010 and they gave me a very sophisticated folder of
retirement investment options," she says. But it was so complex and thick,
she says, "I kind of glazed over when they handed it to me."

And still, 4 years later, she's not saving anything.

Monkeying With Economics

We like to think of
ourselves as rational creatures. But research shows that when it comes to
financial decisions, people can behave a lot like, well, monkeys.

Laurie Santos is a
professor at Yale University. She's done research
experiments where she gave
monkeys money [actually fake money or tokens] and asked them to make financial
decisions. Some of the choices were simple: Do you want to buy 1 grape or 2
grapes with your token?

But amazingly, with much more complex decisions, Santos says,
the monkey responses match the most common human responses exactly.

What about saving
some of those tokens to buy food with later on? "One thing we never saw in
the monkey marketplace was any evidence of saving — just like our own
species," Santos says.

There are all kinds
of complicated psychological and behavioral explanations, with terms like
"loss aversion" and "hyperbolic discounting."

But researchers have
figured out that if a company signs up its workers for a retirement account
automatically — instead of relying on them to fill out the paperwork and make
decisions — it boosts participation dramatically. People can opt out of saving,
but they usually stick with it.

In fact, more companies have been adopting the approach since the
government gave the green light a few years ago, although in the past couple of
years that momentum has stalled.

Automatic
Increases To Boost Saving

Many firms start
workers off automatically saving just 3 percent of their income. Ironically,
that's less than what people choose at other companies when they do get around
to signing up on their own.

Keeping people in at
3 percent and leaving them at 3 percent is not going to generate enough retirement
income for individuals.

Furthermore, while auto-enrollment is generally a good idea, one
downside is that when participants do opt out it can lead to administrative issues
when plan sponsors are left with numerous small account balances.

For those who do “stay in” though, one good option to further automate
savings is a target date fund, which automatically adjusts the investment mix
of retirement savings accounts based on the retirement goals of the individual participants.

Then again, a lot of companies still aren't
doing any of this. Rather, half of all American workers still don't have access
to any 401(k)-type retirement plan — let alone auto-enrollment.